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Housing Market Crash 2022: What to Expect as Interest Rates Rise

12 Minute Read

Many hopeful homeowners have been waiting for a housing market crash so that they can finally enter the market. While it appears that home prices are softening, houses are not becoming more affordable since mortgage rates skyrocketed, reaching a 20-year high.

Consumers are uncertain about the economy's future as inflation continues to soar. While the Fed continues to raise rates to restore the balance of supply and demand, many potential home buyers aren’t sure what to do. They want to enter the market, but many of us are dissuaded by a fear of a recession.

Due to rate hikes, the real estate market is cooling down regarding sales and prices. However, there’s more to the story as the battle against inflation wages on. We will look at the possibility of a housing market crash as interest rates rise.

Why are interest rates still rising?

The Fed has been raising interest rates since March 2022, when they finally had to concede that inflation was no longer transitory. When the cost of borrowing money goes up, mortgage rates are impacted. The Fed has even hinted at interest rates reaching 4.6% in 2023.

As the Fed combats inflation by increasing rates to slow down the economy, there are going to be many sectors that feel the pain. The housing market is one area where the consequences will be felt since mortgage rates will make consumers hesitant to enter the market.

What do rate hikes mean for the housing market?

Interest rate hikes are intended to slow down the housing market, which has catapulted itself to new heights over the past few years.

The country was already dealing with a housing shortage before the pandemic started. Then, when the pandemic hit, many people were working from home and had the flexibility to relocate.

With so many Americans opting to relocate due to newfound freedom with remote work, this increased demand in smaller markets and led to bidding wars.

The biggest issue with rate hikes is that everything becomes more expensive for the average consumer. This is frustrating since inflation is already responsible for rising prices, and people have to deal with additional increases regarding interest rates.

Soaring interest rates are making mortgage payments more expensive. In September 2022, the average rate of 6.29% on a 30-year fixed mortgage meant an additional $600 was added to the monthly cost of being a homeowner on top of the increased costs of everything else.

Moving forward, potential homebuyers will be hesitant about getting into the real estate market because it costs more to borrow money. This doesn’t even factor in any additional assistance needed for home upgrades.

What’s happening with the real estate market right now?

There are always many factors involved that effect the housing market, from home sales to homes on the market to interest rates. Here’s what’s happening with the real estate market right now.

Interest rates are making mortgages seem unaffordable

Since rates just hit a 20-year high, many people are second-guessing getting into the real estate market. The current housing prices are too much for consumers who are already struggling with soaring inflation and the looming recession.

With mortgage rates going up from 3.05% to about 6.92%, the monthly mortgage payment on the median asking price home has gone up 51%. A mortgage payment of $1,698 is now $2,559 each month.

Home prices are coming down

Economists at Fannie Mae have predicted that real estate prices will drop by an average of 1.5% nationally. This is a pivot from the original prediction of a 4.4% home price growth for the year.

Median home prices dropped 0.98% in August, according to Black Knight, a real estate software company. This is only slightly better than July’s decline of 1.05% and means that July and August had the largest monthly decline in real estate prices in 13 years.

These numbers indicate that the rate hikes are working to a degree, in at least enough local markets to effect national averages.

Home sales are cooling off

According to the National Association of Realtors, existing home sales were down 19.9% from a year ago. The August numbers were higher than expected, with an annualized pace of 4.8 million, a 0.4% decline from July.

Research from Redfin identified some important real estate figures that indicate how home sales are declining: 

  • Sold homes were on the market for a median of 33 days, up from 25 days a year ago.
  • New sale listings were down 19% from the previous year.
  • 30% of houses sold went for above the list price, down from 45% a year earlier.
  • Mortgage applications were down 39% from the previous year. 

These figures demonstrate that home sales are finally slowing down as the plans to cool down the economy with higher rates make a noticeable difference in the real estate sector.

Now it’s time to address the elephant in the room.

Will the real estate market crash?

There’s a difference between the real estate market crashing and home sales slowing down. Federal Reserve Chair Jerome Powell brought up last month that the real estate market will cool down and likely go through a correction right after the announcement of the 0.75% rate hike.

He also mentioned that the central bank wants the supply and demand to align better so that home ownership isn’t unattainable for the average American. The issue is that it’s difficult to engineer the perfect situation when it comes to housing prices.

Realistically, record-high real estate prices matched with high-interest rates are making folks put off their homeownership plans. Even though real estate prices are softening, there isn’t much of a difference yet since the prices went up drastically during the pandemic.

The reality is that we will need many more months of home price declines.

One thing to look for is whether we officially enter a recession. This would mean that the economy is shrinking, leading to various financial consequences, from job loss to the entire economy shrinking. Economists from Fannie Mae believe that the real estate market will tip the economy into a recession in 2023.

The goal of the rate hikes has been to restore the supply and demand balance. However, we must pay attention to see what would happen if both supply and demand plunged simultaneously.

There could be major issues when there aren't enough homes for those looking to buy. Right now, there is about three months' worth of housing supply in the market. Realtor.com shows an annual increase of 26.9% in the national inventory of active listings. This means there are still options on the market for those looking to buy houses.

How should you be investing?

Deciding how to invest in real estate can be tricky when you see rates rising and hear a constant droning on about slowing sales. Until the housing market cools off more, most of us will continue investing in the stock market while we work to save enough money for a down payment.

Bottom Line

Higher interest rates and overall uncertainty in the market make all of us nervous about the real estate market.

It’s difficult to determine what will happen next as we wait to see the results of these constant rate hikes. However, we know that bidding wars seem to be a thing of the past as housing prices are slowly softening.

 

This article was written by Q.ai - Powering a Personal Wealth Movement from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.

 

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